Dow Hits Record High Amid Strong Jobs Data, Fed Rate Cut Prospects Diminish | Daily Market Analysis

Dow Hits Record High Amid Strong Jobs Data, Fed Rate Cut Prospects Diminish | Daily Market Analysis
Key events:

• Eurozone - ECB's Lane Speaks
• Eurozone - Eurogroup Meetings
• USA - FOMC Member Bowman Speaks
• USA - FOMC Member Kashkari Speaks 

The Dow surged to fresh record highs on Friday, driven by a surprisingly strong jobs report that highlighted the resilience of the US economy and eased concerns about a potential recession.

The Dow Jones Industrial Average gained 341 points, or 0.8%, closing at a record 42,352.75. The S&P 500 climbed 0.9%, and the NASDAQ Composite advanced by 1.2%.

US nonfarm payrolls saw a substantial increase in September, with 254,000 jobs added, a significant jump from the revised August figure of 159,000, far exceeding economists' expectations of 147,000 new jobs.

Additionally, the unemployment rate edged down to 4.1% from 4.2%, reflecting a healthier labor market. Although this robust job growth reduced the likelihood of a significant interest rate cut at the Federal Reserve's November meeting, it underscored the underlying strength of the US economy. Chicago Fed President Austan Goolsbee praised the report, calling it "remarkable," while also noting that interest rates would likely need to decrease "substantially" over the next 12 to 18 months.

The GBP/USD pair saw moderate gains, rising to near 1.3130 and snapping a three-day losing streak during the early Asian session on Monday. However, the pair’s upward movement could be limited by reduced odds of further Federal Reserve rate cuts after the stronger-than-expected US nonfarm payrolls report on Friday.

In September, the Fed had already reduced rates by 50 basis points (bps), but the upbeat employment data has now decreased the probability of another aggressive cut. According to the CME FedWatch Tool, markets are pricing in a 97.4% chance of a 50 bps rate cut in November, up from 31.1% before the jobs data release.

Pound Sterling rose as the Bank of England signaled it could take a more forceful approach to cutting interest rates. However, BoE Chief Economist Huw Pill emphasized a gradual approach, suggesting the BoE should avoid aggressive rate reductions. Markets remain uncertain on whether the BoE will follow a possible November cut with another in December, which would be the first time since 2020 that the BoE lowered rates in consecutive meetings.

The USD/JPY pair struggled to sustain an upward move past the 149.00 mark, retreating below the mid-148.00s by Monday and snapping a three-day winning streak. Although the currency pair faced some selling pressure, cautious bearish sentiment prevailed, given the potential interventions by Japan’s Finance Ministry. Vice Finance Minister Atsushi Mimura hinted that the government is monitoring FX moves, raising speculation about intervention, which has lent some support to the yen.

Nonetheless, expectations for further rate hikes by the Bank of Japan have diminished, and the possibility of more aggressive Federal Reserve easing policies remains a tailwind for the USD/JPY. New Japanese Prime Minister Shigeru Ishiba also recently expressed concerns that the economy is not ready for additional rate hikes. Furthermore, political uncertainty ahead of Japan's general election on October 27 may keep JPY bulls cautious. Meanwhile, strong US jobs data prompted investors to lower their expectations of a significant rate cut by the Fed in November, keeping the US Dollar supported near a seven-week high.

The USD/CAD pair hovered around the 1.3580 level at the start of the new week, just below its two-week peak hit on Friday. A slight dip in crude oil prices weighed on the Canadian Dollar, as markets anticipated a larger rate cut by the Bank of Canada later this month. The US Dollar remained strong, consolidating its gains, driven by reduced odds of aggressive rate cuts by the Federal Reserve.

Tensions in the Middle East have also been a critical factor, with fears that conflict in the region could disrupt oil supplies and limit crude’s downside. This has helped keep the commodity-linked CAD steady, preventing a further decline in the USD/CAD pair. Technically, the pair may need to surpass the key 200-day Simple Moving Average (SMA) near the 1.3600 mark to signal further upside potential.

Looking ahead, no major economic data from either the US or Canada is scheduled for release on Monday. However, speeches from key Federal Open Market Committee members could influence USD demand, and traders will also be monitoring oil price movements and geopolitical developments for short-term opportunities around the USD/CAD pair.